Risk Management - a conceptual framework-B.V.Raghunanadan
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Transcript of Risk Management - a conceptual framework-B.V.Raghunanadan
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Risk Management: A Conceptual Framework
B.V.Raghunandan,
SVS College,
Bantwal-Karnataka-India
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Meaning of Risk
• Risk is defined as possibility of loss• Lico Reis, ”Degree of uncertainty of
return on an asset”• Investopedia (www.invetopedia.com),
” The chance that an investment's actual return will be different than expected”.
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Classification of Risks
Risk
Pure Risk
Life Insurance General Insurance
Speculative Risk
Financial, Business,
Market and Interest Risk
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A] Pure Risk
• It is a risk where there is no possibility of profit
• There is the expense in the form of insurance premium
• There is a loss when the compensation paid by insurance company is less than the actual loss
• It is a method of dividing the risk among those exposed to a particular type of risk
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B] Speculative Risk
• Speculative risk not only attempts to compensate for the loss, but may also bring in a profit
• Financial risk management tools may bring in profit apart from covering the risk
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A] Pure Risk Management
• Life Insurance and General Insurance• Life Insurance Principles: Utmost Good
faith, and Insurable Interest• General Insurance Principles:
- Utmost Goodfaith
-Insurable Interest
-Indemnity
-Subrogation
-Contribution
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Types of Pure Risks
• Risks relating to physical assets• Risks relating to human assets• Risks relating to liability
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B] Speculative Risks
• Business Risk• Default Risk• Market Risk• Liquidity Risk• Credit Risk• Exchange Risk
• Financial Risk• External Environment
Risk• Environment Risk• Attrition Risk• Manufacturing Risk• Risk of Natural
Calamity
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Handling the Risk
• Risk Management
• Risk Retention
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Risk Management: Action
• Risk Avoidance• Diversification• Spin-off• Risk Transfer• Risk Sharing• Fighting Fire with
Fire
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Risk Retention: Acceptance
• Rationale:
1. When it can not be avoided
2. High cost of management of risk
3. Risk management may increase loss
4. Where control is difficult
5. Where risk management is too complex
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Risk Management Process: Steps Involved
1) Identification of Objectives: competition, stability in earnings, meeting customer expectation, treasury management, cost control, protecting foreign markets
2) Identification of Risks
3) Evaluation of Risk
4) Selection of Policy
5) Developing Strategy
6) Organisational Authority
7) Organisational Control & Corrective Action
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THANK YOU